Responding to Euromoney’s longstanding survey of
country risk, global economists are increasingly buoyant about
the prospects for Paraguay’s economy, with rating
indicators of political and economic health suggestive of
higher growth and better times ahead for the small but vibrant
Latin American country.

Paraguay’s $1 billion worth of bond sales this
year were preceded by an improving risk trend underpinned by
the election as president last year of right-wing Colorado
Party candidate Horacio Cartes, a prominent businessman.
Elected in April 2013 and sworn in last August, Cartes is
driving through substantive reform in spite of popular
resistance, and his efforts are diminishing his
country’s risk.

These positive signs have translated into the country
receiving an improved assessment from economists participating
in Euromoney’s Country Risk Ratings, a development
which bodes well as the country attempts to shake off the
economic and social challenges of the past three years.

Euromoney’s country risk rankings can be a
useful guide to how macroeconomists perceive the sovereign risk
profile of different countries over time. The survey uses a
simple methodology to measure political and economic risk, as
well as the structural factors that affect a
country’s risk profile, applying the same criteria
to both advanced and emerging economies. As the survey is
compiled on a real-time basis, the ratings often illustrate
trends in risk perception earlier than other leading
indicators, such as traditional credit ratings.

With the exception of perennial crisis-sufferers Argentina
and Venezuela, the past decade has been a golden one for many
Latin American sovereigns, with commodity-producing countries
such as Brazil, Chile and Colombia receiving their highest-ever
rankings in the Euromoney survey. However, many of these
countries saw their rankings start to slip in 2013 as a reduced
rate of growth, higher inflation and a wider sell-off in
emerging market assets by international investors saw a
reversal of the previously buoyant economic outlook.

Bucking the trend

In contrast, Paraguay’s ECR score, which had
previously remained static due to a combination of political
gridlock, macroeconomic uncertainty and insufficient
investment, has greatly improved in the past two years as
political reform and surging economic growth have made the
country one of the most attractive investment destinations in
Latin America, at a time when larger countries such as Brazil
have seen their economies stall.

Since 2010 Paraguay’s risk score has increased
by almost 3.2 points. The increase reflects rapid economic
growth in recent years, as well as the economic reforms and
increased foreign investment that have boosted the
country’s prospects. This year alone,
Paraguay’s ECR score has climbed 1.8 points, to
42.4 out of a maximum 100, placing it 80th out of 186 countries
in ECR’s global rankings. This is four places
higher since the end of last year, and seven in all since 2012.
No wonder Moody’s and S&P felt compelled to
upgrade Paraguay recently, to Ba2 and BB respectively. ECR
experts had foreseen the shift.

Paraguay’s economy is one of the most dynamic
in the region. After registering a stunning 13% growth rate in
2013, growth this year has settled down to a third of that rate
in real terms. Private sector forecasters polled by consultancy
Focus Economics predict 4.8% growth this year. BBVA Research, a
longstanding contributor to the risk outlook for several
countries in ECR’s survey, predicts 5.3% growth
based on "a strong agricultural sector and further boost of
investment, both private and public".

The outlook is not without challenges. A score below 50
shows there is reason to be cautious in a country where
political opposition may curtail the president’s
ambitious programme - as was highlighted by a general
strike in March, the first in 20 years, by angry voters
opposing job cuts.

Economic growth can be volatile, too, in a country relying
on a good harvest of soybeans, sugarcane and other cash crops,
while female workforce participation could be improved
alongside worrying poverty indicators.

Nevertheless, such impressive growth in recent years is a
far cry from the depressed state of neighbouring Argentina, an
economy in decline and, worse still, in default.

Political and structural shift under
way

For a picture of the effect that the
government’s economic reforms are having, look no
further than Euromoney’s political risk indicator,
a measure of the country’s stability and the
strength of its institutions and the rule of law.
Paraguay’s score has significantly improved in
recent quarters as the measures put in place by policy-makers
have begun to take effect.

Traditionally, Paraguay has scored badly for corruption,
transparency and government policy blighted by an obtrusive
regulatory regime. Yet the shift in political ethos back to the
right following six years of left-wing government has seen
those risks subside. Five of Paraguay’s six
political indicators have improved since last year, notably the
government stability sub-factor.

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